Global Climate Weak, But Still Stable

In the "MAPI Quarterly Forecast of U.S. Exports, Global Growth, and the Dollar: Second Quarter 2008 Through Fourth Quarter 2009," there is evidence that the U.S. recession and financial crisis are having a material impact on the near-term prospects for economic growth in key industrialized regions, most notably Canada, the Eurozone and the United Kingdom. But while weaker growth is likely in these areas, there are not signs of significant instability in the global picture and a "soft landing" for industrialized countries and overall world growth remains within reach, says MAPI. Further, economic activity remains robust in South Asia and East Asia outside of Japan.

MAPI economist Cliff Waldman predicts a weaker but still stable global economic climate, although forecast risks are clearly on the downside in a world in which multiple concerns include virtually uncharted financial uncertainty. Much, he argues, will depend on the implementation of appropriate policies, particularly by central banks.

"The mixture of considerable short-term U.S. weakness, and a world economy whose strengths have grown with the evolution of new and dynamic markets, has created a cloudy outlook, the likes of which the forecasting community has not confronted in decades," Waldman said. "Most likely, in the absence of further financial shocks, accommodative but stable monetary policies by key central banks should produce a period of slower but stable world growth."

U.S. exports should continue to be somewhat of a safety valve for the domestic economy in the next 18 months. As weaker global growth and a weaker dollar offset each other, U.S. export growth in 2008 is expected to remain essentially unchanged from 2007 at 8.1%. Moderately stronger growth in the industrialized countries outside of the U.S., in tandem with the continuing benefits of a weaker dollar, should result in a modest acceleration of export growth to 8.7% in 2009.

Growth in non-U.S. industrialized countries, which include Canada, the Eurozone (plus Denmark, the United Kingdom, and Sweden), and Japan, will be a weak 1.8% from the second quarter of 2008 through the end of the year. If, as anticipated, the U.S. economy recovers, growth in these countries should accelerate to 2% for the first half of 2009 and then to 2.2% for the second half.

The likelihood of a modest but stable slowdown in the Chinese economy, and its likely impact on the East Asian region, supports MAPIs forecast that aggregate GDP growth in developing countries will slow from 5.4% during the second quarter of 2008 to 5.2% during the second half of 2008. The downward trend is expected to continue, decelerating to 5.1% growth during the first half of 2009, 5% during the third quarter of 2009, and 4.9% during the fourth quarter.

MAPI predicts that the dollar adjustment will likely continue through next year. Waldman forecasts that the dollar will decline by 3% on a compound annual basis against the currencies of industrialized trading partners during the second, third, and fourth quarters of 2008. As the U.S. economy regains some footing in 2009, the dollar will experience a 2% decline during the first quarter, followed by a flat performance during the second and third quarters, and a 2% appreciation during the fourth quarter.

Against the currencies of the developing countries, MAPI forecasts a decline of 10% during the second and third quarters of 2008 and a 5% decline during the subsequent three quarters. MAPI anticipates a 3% decline during the third quarter of 2009 and a flat performance during the fourth quarter.

"The much welcome appreciation of East Asian currencies highlights one potential legacy of the current period of economic uncertainty and financial turmoil," Waldman added, "which is greater stability in global current accounts and stronger global financial stability over the long run."